Chap 20
1. Money is anything that people generally accept as payment for goods and services.
1. Explain what money is and how its value is determined.
• How is the value of money determined?
The value of money depends on the money supply; that is, how much money is available to buy goods and services. Too much money in circulation causes inflation. Too little money causes deflation, recession, and unemployment.
2. Because the value of money is so important to the domestic economy and international trade, an organization was formed to control the money supply.
2. Describe how the Federal Reserve Controls the money supply.
• What's that organization and how does it work?
The Federal Reserve makes financial institutions keep funds in the Federal Reserve System (reserve requirement), buys and sells government securities (open-market operations), and lends money to banks (the discount rate). To increase the money supply, the Fed can cut the reserve requirement, buy government bonds, and lower the discount rate.
3. In the American colonies, there were no banks at first and coins were limited. The colonists traded goods for goods instead of using money.
3. Trace the history of banking and the Federal Reserve System.
• How did banking evolve in the United States?
Massachusetts issued its own paper money in 1690; other colonies followed suit. British land banks lent money to farmers but ended such loans by 1741. After the American Revolution, there was much debate about the role of banking, and there were heated battles between the Central Bank of the United States and state banks. Eventually, a federally chartered and state-chartered system was established, but chaos continued until many banks failed in 1907. The system was revived by the Federal Reserve only to fail again during the Great Depression. The Fed, banks, and S&Ls were in the news during the 1990s because many banks and S&Ls failed and the Federal Reserve kept raising interest rates. The Fed then cut interest rates 13 times.
4. Savings and loans, commercial banks, and credit unions are all part of the banking system.
4. Classify the various institutions in the U.S. banking system.
• How do they differ from one another?
Before deregulation in 1980, commercial banks were unique in that they handled both deposits and checking accounts. At that time, savings and loans couldn't offer checking services; their main function was to encourage thrift and home ownership by offering high interest rates on savings accounts and providing home mortgages. Deregulation closed the gaps between banks and S&Ls so that they now offer similar services.
• What kinds of services do they offer?
Banks and thrifts offer such services as savings accounts, NOW accounts, CDs, loans, individual retirement accounts (IRAs), safe-deposit boxes, online banking, insurance, stock, and traveler's checks.
• What is a credit union?
A credit union is a member-owned cooperative that offers everything that a bank does. That is, it takes deposits, allows you to write checks, and makes loans. It also may sell life insurance and make home loans. Because credit unions are member-owned cooperatives rather than profit seeking businesses like banks, credit union interest rates are sometimes higher than those from banks, and loan rates are often lower.
• What are some of the other financial institutions that make loans and do other bank-like operations?
Nonbanks include life insurance companies that lend out their funds, pension funds that invest in stocks and bonds and make loans, brokerage firms that offer investment services, and commercial finance companies.
5. The government has created organizations to protect depositors from losses such as those experienced during the Great Depression.
5. Explain the importance of the Federal Deposit Insurance Corporation and other organizations that guarantee funds.
• What agencies ensure that the money you put into a bank, S&L, or credit union is safe?
Money deposited in banks is insured by an independent government agency, the Federal Deposit Insurance Corporation (FDIC). Money in S&Ls is insured by another agency connected to the FDIC, the Savings Association Insurance Fund (SAIF). Money in credit unions is insured by the National Credit Union Administration (NCUA). These organizations protect your savings up to $100,000 per account.
6. There will be many changes in the banking system in coming years.
6. Discuss the future of the U.S. banking system.
• What are some major changes?
One important change will be more services offered by banks, including insurance, securities (stocks, bonds, and mutual funds), and real estate sales. Electronic funds transfer (EFT) systems will make it possible to buy goods and services with no money. Automated teller machines enable you to get foreign money whenever and wherever you want it. Online banking may change the banking process dramatically as people become more used to paying bills and conducting other transactions online. ATMs will offer more services, including the ability to pick up tickets to events and download music.
7. Today's money markets aren't national; they are global.
7. Evaluate the role and importance of international banking, and the role of the World Bank and the International Monetary Fund.
• What do we mean by global markets?
Global markets mean that banks do not necessarily keep their money in their own countries. They make investments where they get the maximum return.
• What are the roles of the World Bank and the IMF?
The World Bank (also known as the International Bank for Reconstruction and Development) is primarily responsible for financing economic development. The International Monetary Fund (IMF), in contrast, was established to assist the smooth flow of money among nations. It requires members (who join voluntarily) to allow their own money to be exchanged for foreign money freely, to keep the IMF informed about changes in monetary policy, and to modify those policies on the advice of the IMF to accommodate the needs of the entire membership.